Saturday, December 26, 2009

Victims of clever marketing

This blog post is based on a comment I made on Kevin J. Gamble's blog article Jobs: The trend line is not positive. Gamble's article in turn was also based on a comment he intended to make in another blog article that also describes the magnitude of the job creation challenge that faces most advanced economies in the aftermath of the "global financial crisis" (GFC).

The thesis of Gamble's article and the article he refers to is the reality that there may be no jobs to go back to despite all efforts to "create" new ones to replace those that were obliterated by the collapse.

And here is what I think:

I think there are no jobs to go back to because most of the ones that were lost were created on the back of a layer of perceived value that coated the core of tangible value in our economies' asset base before this crisis. The GFC I believe and as I have read in many articles, at its most fundamental, serves as a severe test of asset value. Not surprisingly, it is assets that lack substance that are at biggest risk.

Compared to the past when an asset was tangible in the sense that you could see the direct connection between its value and its ability to produce tangible goods, what constitutes the asset bases of our economies today are increasingly abstract (accounted for by things like brand equity, goodwill, and complex securities).

Whereas one couldn't plow a field to produce the season's harvest without a horse, today, it is still possible to sell a cola drink even without the brand "Coca Cola". The Coca Cola brand in this example is booked as an asset with a nominal value in the Coca Cola Company's balance sheet. Yet factories can still physically continue to churn out the drink even if the brand disappeared tomorrow.

The value added by the Coca Cola brand is in the role it plays in the "creation" of demand -- i.e., the brand represents demand creation capability. However the brand itself does not represent production capability.

In short the Coca Cola brand creates demand for cola drinks -- through the clever marketing machinery it keeps humming that continuously makes people believe that they need or want to drink Coke. When demand collapses, enterprises that are valued for their demand creation capability are most vulnerable to asset deflation. Of course, Coca Cola is not the sort of nebulous "asset" that gets hit hard by financial "crises" that cause collapses in aggregate demand. But my point is that there is a huge chunk of our economy that is propped up by demand for non-essential goods and services. That they are non-essential highlights the reality that our demand for these goods and services was created by clever marketing. And it is this clever marketing that made valuable "assets" of what are really nebulous business artifacts like brands and other "assets" that underpin much of the market capitalisation that accompanies such perceptions of value.

Worse, we keep seeing population growth as a good thing because it keeps enterprises whose business models are premised on the idea of creating demand healthy. Yet when demand goes, we are stuck with the dependence on "creating jobs" and increasing agricultural yields, which in turn accounts for our addiction to petroleum-guzzling industrial agriculture methods. That includes the petroleum-based synthetic fertilisers that constitute a major input into food production.

Catch my drift so far?

This is a world where our very standard of living owes itself to the idea that we as a species should sustain and even grow the voraciousness at which we chomp away at our planet's resources, all for the sake of keeping "aggregate demand" up so that money continues to exchange hands at a fast enough rate.

Next time we something we see on TV convinces us that we "need" or even "deserve" that overseas vacation with the additional sweetener of rock-bottom airfares, perhaps we should pause and think twice about what it is we are really spending on.

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